FDIC Looks to Implement New Scorecard for Making Assessments

The Federal Deposit Insurance Corp.'s(FDIC) board of directors approved a Notice of Proposed Rulemaking (NPR) revising the deposit insurance assessment system for large institutions.

The current assement system poses unique and concentrated risks to the Deposit Insurance Fund, according to a release from the agency.

"Events during the past two years have made clear the need for improvement in how well and how quickly we recognize and charge for risk," FDIC Chairman Sheila Bair said. "This proposal is a significant improvement to how we do that."

Under the proposal, risk categories and long-term debt ratings would no longer be utilized. However, the FDIC would still use the supervisory ratings as a factor in measuring risk. It would be replacing the financial ratios now used with a scorecard that has well-defined financial measures that are more forward looking and better suited for large institutions.

The proposal also has questions on how to incorporate other risk measures, such as the quality of underwriting or risk management practices.

"If we had used the proposed system during pre-crisis periods, it would have predicted the current rank ordering of large institutions much better than the system used now," Bair said. "The proposed system is fairer and less pro-cyclical because it charges for risk when it is assumed, and it provides incentives for institutions to avoid excessive risk during economic expansions."

The proposal would create two scorecards: one for large institutions and the other for highly complex institutions.

A highly complex institution would be defined as an insured depository institution with more than $50 billion in total assets that is fully owned by a parent company with more than $500 billion in total assets.

The designation would also apply to a processing bank and trust company with over $10 billion in total assets. Each scorecard would have two components — a performance score as well as a loss severity score — that are of particular interest to the FDIC as an insurer.

Two scores would be combined to get to a total score, which would then be translated into an initial assessment rate. Like the current system, the FDIC could still make limited discretionary adjustments.

The proposal would also change the assessment rates that are applicable to all insured depository institutions to make sure that the revenue collected under the proposed assessment system would be about equal that under the existing assessment system.

"By better differentiating risk among large institutions, the proposal would reduce insurance assessments paid by lower-risk institutions—both large and small," Bair said,

There will be a 60-day public comment period upon publication in the Federal Register.

In a separate interview with ASR, a FDIC spokesperson at said that the agency is proposing to no longer use debt ratings and instead use a scorecard. However, the examination rating known as CAMELS will still be used.

The acronym CAMELS refers to the five components of a bank's condition that are assessed: Capital adequacy, Asset quality, Management, Earnings, and Liquidity. The S stands for Sensitivity to market risk, a sixth component that was added in 1997.

Ratings are assigned for each component aside from the overall rating of a bank's financial condition. The ratings are assigned on a scale from one to five. Banks with ratings of one or two are considered to present few, if any, supervisory concerns, while banks with ratings of three, four, or five present moderate to extreme degrees of supervisory concern.

The board will also vote on a proposal that the agency extend its Transaction Account Guarantee (TAG) program for another six months to ensure that the community banks that are still relying on the government backing do not lose business accounts to larger banks that could be perceived as more stable.

The FDIC board would also like to reserve the option tp extend the program to over 12 months if needed.

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